New home sales: Down 80% from the boom

By Les Christie, staff writerNovember 24, 2010: 11:29 AM ET

NEW YORK (CNNMoney.com) -- Don't look to the new home market for glad economic tidings: Home builders had another dismal sales month in October, falling to just one-fifth of the sales rate during the boom five years ago.

New home sales dropped to an annual pace of just 283,000, according to the Commerce Department. That was down 8.1% from a slow September and 28.5% from 12 months ago when the annualized sales rate was at 430,000.

Housing experts from Briefing.com had forecast a sales pace of 314,000.

"The new home market delivered another turkey of a performance last month," said Mike Larson, a housing market analyst with Weiss Research. "Sales fell sharply across most of the country."

Sales are off nearly 80% from the housing boom peak pace of 1.4 million, set in July 2005. Sales have remained near historic lows this year despite very attractive mortgage interest rates that slash the monthly costs of homeownership.

The Commerce Department also revised August sales figures downward to 275,000, which represents the record low point for new homes sales since it started tracking figures in 1963.

There's a major factor depressing home sales of all kinds, according to David Crowe, chief economist for the National Association of Home Builders.

"We're fallen significantly in the number of people forming their own households," he said. "They're worried about the economy and they're worried about their jobs."

Usually, household formation rises 1% a year or more as people get married, come to the states from overseas, and start careers.

But the poor economy has meant that many grads can't find jobs, and so they move in with parents instead or double up with peers. Fewer immigrants arrive and couples delay marriage. All of those things diminish home sales.

When people do look for homes, they find a glut of existing homes competing with new homes for sale, according to Larson.

"So much bargain-priced, 'used' home inventory is available that the builders just can't compete," he said. "Over time, we'll work through that mountain of existing home supply. But the key words are 'over time.' New home builders won't have much to be thankful about any time soon.

The median price for existing homes sold in October was just $170,000, compared with $194,900 for new homes. That's the lowest median price for new homes sold in seven years and down 13.9% from September.

Crowe said that indicates many of the buyers were first timers. They're less constrained than older potential buyers because they don't have to worry about selling their existing homes in order to purchase new ones.

Another obstacle for buyers is that there are still challenges in obtaining mortgages, according to Leif Thomsen, CEO of Mortgage Masters, a mortgage lender.

"A lot of potential buyers just can't get financing," he said. "The underwriting is very strict."

One encouraging aspect of the report for home builders is that inventory continued to wane. The number of new homes for sale at the end of October was about 202,000, less than nine months' supply at the current rate of sales. The number of homes on the market has dropped about 20% since October 2009.

"The builders have been smart enough to not overbuild," said Thomsen. "Once the economy turns around, that inventory could vanish quickly."